In last month’s blog I wrote about it not being all doom and gloom. Well, the news continues to get better with the Australian Prudential Regulation Authority (APRA) lifting the cap on interest only (I.O.) loans effective 1st of January 2019. This is particularly good news for investors or those wanting to invest in the property market.
Why was the cap put in place by APRA?
Back in March of 2017 APRA placed a cap of 30% for I.O. loans with banks and lenders. They did this because at one point, I.O. loans accounted for 46% of mortgages across all banks and lenders. APRA thought this was too high because they believed that I.O. loans are a risker loan type for borrowers and so wanted to reduce the risk.
What did it mean for borrowers during this time?
To meet the new cap requirements banks and lenders raised interest rates on investment loans, and they also implemented new policies that saw investors having to save larger deposits to reduce the loan to value ratio (LVR).
Why has APRA lifted the cap?
APRA announced in December of 2018 that the 30% cap on interest only loans would be lifted effective 1st of January 2019 because there had been a significant reduction in interest only loans since the cap was introduced.
Why is an interest only loan beneficial to investors?
Myself and my husband are property investors, and when we originally took out our investment loan’s we had I.O. only terms of between 5 and 7 years because we wanted the additional cash flow.
You see, when you have an I.O. loan you are only paying the interest portion of the loan and not the principal, so the loan repayments effectively were less than if you were paying both the principal and interest (P&I).
The other reason we did this is because initially we were relying on capital growth in our properties and were not too worried about getting the principal portion of our loan’s down. Our strategy has since changed, and we now pay both the principal and interest on our investment loan’s.
First home buyers
First home buyers deserve a mention in this newsletter because this opens up some great opportunities, especially if they are considering purchasing an investment property to get themselves on the property ladder. They can continue to live at home with their parents or go down the path of rentvesting depending on where they currently are in their lives.
There are some banks and lenders that have already started to shift their policies for investors and I’m sure there’ll be more as time goes on. ANZ is one of these lenders who have advised that effective 25th of March 2019 they will be increasing the LVR to 90% for investment lending and increasing the interest only period up to 10 years.
Whatever your goals or your current plans, get out there and research what is currently happening in the property market so you can educate yourself ready for that purchase. It is also a great idea to get in touch with myself if you are ready to purchase so that I can review your financial situation and where possible get a pre-approval in place – Nikki Berzin.
Disclaimer: Your full financial needs and requirements need to be assessed prior to any offer or acceptance of a loan product. Subject to lenders terms and conditions, fees and charges and eligibility apply.